Public Finance: Meaning, Definition, Scope, and Functions

What is Public Finance?

The government of every country needs to perform certain functions for the betterment of society. Obligatory functions and optional functions are two major types of functions that the government of every country undertakes. Obligatory functions are the functions that are necessary for the government to perform and include, protection of the country from external aggression, internal distortion, maintenance of peace and security, etc. Optional functions are the functions in the absence of which a country can survive. The fund required for such functions is acquired, maintained, and used through the medium of Public Finance. Public finance is the science that deals with the income and expenditure of the public authorities. The public authorities include all types of governments; namely, district, state, and national level governments.

According to Mr. Dalton, “Public finance is one of those subjects which lie on the borderline between economics and politics.”

Subject Matter of Public Finance

To understand the concept of public finance, its importance, limitations, doctrine, etc., we first need to study the subject matter of public finance. There are various components studied under public finance, including Public Revenues and Expenditures, Public Debts, Financial Administration, and Fiscal Policy. 

1. Public Revenues: Public revenues study the concept of income of the government which the government uses to fund its operations. The main source of income for the government is through tax. Public finance undertakes the study of the incidence of tax.

2. Public Expenditures: The government needs to provide certain facilities to the public for their well-being and to make society better as a whole. Public finance studies the expenditure of government towards different functions, along with the ways and methods by which the government can reduce its expenditure.

3. Public Debts: Sometimes, the government needs to borrow funds from the public to cover its deficit. Thus, public finance also studies the concept of borrowings from the public; namely, public debts and how the government manages the public debts. For example, the Indian government has borrowed from the people to implement the Five Year Plan.

4. Financial Administration: Under financial administration, the study of various important subjects, like financial management by the government, the preparation of the budget, its final acceptance by the legislature, etc., is conducted.

5. Fiscal Policy: Fiscal policies deal with the effects of the financial operations of the government on various aspects of the functioning of the national economy, such as prices, employment, consumption, production, distribution of wealth, etc.

Importance of Public Finance

In the 19th century, the importance of public finance was not very wide as the government did not intervene in public finance, and the tax imposition was very low. The main aim of the government at that time was to protect the country from internal disorders and external aggressions. But in modern times, the importance of public finance has widened. The government started to intervene in public finance and various strategies have been set up by the government to manage the same. Some of the importance of public finance are:

1. Subsidies and Grants: The government, these days gives subsidies and grants to facilitate industries with monetary support to increase the production of essential goods in the domestic country.

2. Taxation: The government levies taxes on some harmful things as well, like cigarettes and alcohol, which are injurious to health. This practice is considered for the welfare of the public as a whole.

3. Protection of Infant Industries: The domestic infant industries are often provided with protection from foreign industries through tariffs, quotas, and embargoes.

4. Optimum Utilisation of Resources: Public finance puts an effort into optimising the utilisation of resources, which is a major concern of developing and under-developed countries.

5. Employment Opportunities: Public finance also undertakes the goal of increasing the level of employment, especially during the depression. The government has to spend increasing amounts on public works to afford employment opportunities for unemployed people within the country.

Scope of Public Finance

By the end of the nineteenth century, public finance changed its definition completely. Previously, it was believed that the government spends unnecessarily, and there is no need to make any expenditure from the side of the government. Also, it was considered that the government should not levy taxes on the public to not burden the public with taxes. The principle of individualism prevailed during the nineteenth century, and it was believed that the public should be set free with their finance and that the government doesn’t need to invade into their decisions. But, in the present century, the invasion of government has significantly increased public finance. Expenditure done by the government on education, health, etc., has increased significantly to make society better as a whole. Tax levied by the government on harmful products like cigarettes, alcohol, etc., is also considered valid. The scope of public finance has broadened over time and includes various studies to study the behaviour of government towards income, expenditures, borrowing, budgets, etc. The concept of public finance is studied with the help of-

• Public Revenues
• Public Expenditures
• Public Debts
• Financial Administration
• Fiscal Policy

Functions of Public Finance

There are three major functions of public finance, The Allocative Function, The Distribution Function, and The Stabilising Function.

1. Allocative Function: In the present century, expenditure of government has increased significantly. Functions, like promoting business, betterment of agriculture sectors, fluency in industrial sectors, access to good education and better health facilities, etc., involve a lot of expenditure. The allocative function of public finance undertakes the optimal allocation of resources to various heads. By optimally allocating the resources, the government can maximise welfare and minimise the overall cost.

2. Distribution Function: One of the major concerns in almost all developing countries is the unequal distribution of income. The distribution function of public finance tries to distribute the income equally among various societies of the country. The income, expenditure, and borrowing aspects of government with respect to equal distribution are taken care of under this function.

3. Stabilising Function: Present times are affected by the dynamic environment more than ever. Various phases, like booms, depression, etc., affect everyone causing damage to the economy. This type of instability is eliminated, and/or reduced under the stabilising function of public finance. Correlation of taxes, expenditures, and debt policies are some of the practices to avoid instability.